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Sometimes organic growth simply isn’t enough. Sometimes you need to take out the competition. Sometimes your entry into a new market simply cannot be effective without such a strategic move.
With Copernicus working with you and on your behalf there are key disciplines that are brought to the acquisition process. One of which is the discipline to walk away.
Indeed, we would say that knowing when to walk away from a deal is one of the most difficult responsibilities to execute.
In a recent survey of 250 senior managers with M&A responsibilities, half said their due-diligence process had overlooked significant problems, and half found that targets had been dressed up to look better for deals.
Two-thirds said their approach routinely overestimated the synergies available from acquisitions. Overall, only 30 per cent of executives were satisfied with their due-diligence processes. A third acknowledged they had not walked away from deals despite nagging doubts.
To address these common shortcomings properly, acquirers can start by ridding themselves of their assumptions.
When senior executives begin to look at an acquisition, they quickly develop a mental image of the target company, often drawing on its public profile or its reputation within the business community.
That mental image shapes the entire deal-making process - it turns into the story management sells to itself about the deal.
The advantage of working with Copernicus on the project lies in us being industry outsiders. We ensure that basic questions about how an acquisition truly will make money for investors are asked – and answered.
This circumspect approach has helped us to negotiate and implement a 240% increase in successful ( that’s another key word) acquisitions in 2007 than in 2006, and implement the structure behind the acquisition strategy (implement being your next key word)
How do we hone our deal-making acumen?
Rather than rely on secondary sources and biased forecasts provided by the target company itself, Copernicus build our own proprietary, bottom-up view of the target and its industry. Together with you, the acquirer, we form an investment committee that tests the deal logic, the attractiveness of the opportunity and then take a final decision.
Usually we focus our due diligence on four interrelated areas that we call the four C's: customers, competition, costs and capabilities.
To arrive at a business's true stand-alone value, all accounting idiosyncrasies must be stripped away. In most instances, the only way to do that is to look beyond the reported numbers by sending the due diligence team into the field. Equally important, putting a team into the field is often the best way to assess a target's future prospects.
Successful acquisitions begin by drawing a map of the target's market - its size, its growth rate and how it breaks down by geography, product and customer segment. This allows us to analyse a target's customer segments - their profitability potential and where they are vulnerable.
Next, we compare the target company's industry presence with that of competitors. How does it stack up in terms of customer feedback, market share, revenues and profits by geography, product and segment?
By looking at the pool of available profits, you can determine whether the target is getting a fair (or better) share of industry profits compared with its rivals.
Then we run the expense numbers. Do competitors have cost advantages? Why is the target performing above or below expectations? When considering post-merger opportunities for reducing costs, we can assess whether the benefit of sharing costs with other business units will outweigh the lack of focus that can arise from spreading costs across multiple businesses.
Copernicus will ensure that you are not buying just a P&L, a balance sheet and a cash flow; you also gain capabilities such as management expertise.
Capabilities may not be easy to measure, but taking them for granted can be too large a risk.
In the end, effective due diligence is about balancing opportunity with informed scepticism. It is about testing every assumption and questioning every belief. It is about not falling into the trap of thinking you'll be able to fix problems after the fact. By then it is usually too late.
Copernicus. Guiding your business to the right acquisition
info@copernicus consulting.com